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Internet banks can't stand-alone

KPMG examines three high profile stand-alone internet or direct banking operations and gives a report on their success (or otherwise).

Monday, May 7th 2001, 3:23PM

by Jenny Ruth

Although New Zealand’s financial institutions have accepted the internet as a strategic necessity, fundamental to their success, it continues to be a major challenge for them, according the KPMG’s latest annual survey of financial institutions.

And, as has been found internationally, `pure play’ or stand-alone internet banking services don’t appear to be a goer.

KPMG examines the three high profile players active in New Zealand in 2000 as stand-alone internet or direct banking operations, for all of whom home loans are the staple diet, and finds none are yet profitable.

BankDirect is close to being profitable, according to its parent, ASB Bank. But ASB’s recent move to merge BankDirect’s back office operations with its own, integrating technology and sharing back-office functions supports the growing concensus that there is little room for `pure plays,’ KPMG says.

AMP Banking, which made a net loss of $22.6 million in 2000, has consolidated all its back office operations to Australia. AMP found that acquisition costs, such as mortgage broker commissions, can be expensive while a loan portfolio is growing from a relatively small base, KPMG says.

`In theory, an internet banking service can be delivered at a fraction of the cost of a bricks-and-mortar service. But finding a formula that works has proved very difficult in most countries where it’s been tried,’ KPMG says.

The problem, it says, is that although online banking appeals to a niche market, the volumes are relatively small and the setup technology is expensive. As well, internet banks need to spend considerable amounts on advertising to get noticed.

AC Neilsen figures for advertising spending indicate that if BankDirect were paying standard rates, its advertising bill in 2000 would have been nearly $2.2 million with most of the money spent on television advertising.

The third player, a New Zealand version of US online mortgage broker E-Loan launched in mid-2000, didn’t meet revenue targets and was forced to restructure with discount retailer The Warehouse taking a stake in it.

E-Loan had planned to make its money from commissions from placing mortgages with the 18 lenders included on its internet site and from forward fees for the duration of each mortgage.

Instead, borrowers used E-Loan to compare the different lenders and then went armed with that information to their existing banks to negotiate their loans, KPMG says.

Nevertheless, internet customers of the five major retail banks more than tripled from 112,890 in 1999 to 345,130 last year, KPMG found. Westpac’s first-half results released on Friday suggest growth continues at a similar rate. WestpacTrust’s internet customers grew 28% to 86,000 between 31 December and 31 March and continues to add more than 1,000 new customers a week, the bank says. WestpacTrust had no internet customers in March last year.

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Full Rates Table | Compare Rates

Lender Flt 1yr 2yr 3yr
ANZ 5.79 5.05 ▼5.25 5.59
ANZ Special - 4.55 ▼4.75 -
ASB Bank 5.80 4.85 5.19 5.49
ASB Bank Special - 4.45 4.79 5.09
BankDirect 5.80 4.85 5.19 5.49
BankDirect Special - 4.45 4.79 5.09
BNZ - Mortgage One 6.50 - - -
BNZ - Rapid Repay 5.95 - - -
BNZ - Special - 4.59 4.79 5.09
BNZ - Std, FlyBuys 5.90 4.99 5.29 5.59
BNZ - TotalMoney 5.90 - - -
Lender Flt 1yr 2yr 3yr
Credit Union Auckland 6.70 - - -
Credit Union Baywide 6.15 5.45 5.50 -
Credit Union North 6.45 - - -
Credit Union South 6.45 - - -
Finance Direct - - - -
First Credit Union 5.85 - - -
Heartland 6.70 7.00 7.25 7.85
Heartland Bank - Online - - - -
Heretaunga Building Society 5.75 5.00 5.20 -
Housing NZ Corp 5.79 4.85 5.24 5.49
HSBC Premier 5.79 4.09 4.29 4.89
Lender Flt 1yr 2yr 3yr
HSBC Premier LVR > 80% - - - -
HSBC Special - - - -
ICBC 5.80 4.59 4.69 5.09
Kiwibank 5.80 4.95 5.29 5.59
Kiwibank - Capped - - - -
Kiwibank - Offset 5.80 - - -
Kiwibank Special - 4.45 4.79 5.09
Liberty 5.69 - - -
Napier Building Society - - - -
Nelson Building Society 6.10 5.10 5.45 -
Resimac 5.30 4.86 4.94 5.30
Lender Flt 1yr 2yr 3yr
RESIMAC Special 5.00 - 4.75 -
SBS Bank 5.89 4.99 5.29 5.59
SBS Bank Special - 4.59 4.85 5.25
Sovereign 5.90 4.85 5.19 5.49
Sovereign Special - 4.45 4.79 5.09
The Co-operative Bank - Owner Occ 5.75 4.59 ▼4.79 5.09
The Co-operative Bank - Standard 5.75 5.09 ▼5.29 5.59
TSB Bank 5.80 4.80 5.15 5.45
TSB Special - 4.55 4.79 4.99
Wairarapa Building Society 5.70 4.85 4.99 -
Westpac 5.95 4.99 ▼5.19 5.59
Lender Flt 1yr 2yr 3yr
Westpac - Capped rates - 5.26 5.36 -
Westpac - Offset 5.95 - - -
Westpac Special - 4.59 ▼4.79 5.09
Median 5.80 4.85 5.15 5.38

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